The decision to set up a self-managed super fund (SMSF) is one that is often followed by a decision surrounding the fund’s membership. While almost anyone can be a member of your fund, this decision needs to be carefully considered because it may influence the fund’s structure and potentially introduce additional risks by providing decision-making powers to children.
As a high level starting point, the superannuation rules are relatively simple in this area. That is, there can only be a maximum number of four members in any one SMSF.
To that end, SMSFs typically consist of two members, and statistics released by the Australian Tax Office in September confirm that close to 70% of all SMSFs have two members, while almost 23% are single member funds.
However, as we dig deeper, the rules do become a little more complex – particularly if you are considering a child as one of these members!
That’s because a critical requirement of SMSFs is that all members of the fund must be accountable for the running of the fund, and this means they are duly given a level of decision-making power to carry out this responsibility.
So, in general terms, superannuation rules require all the fund’s members to either be appointed as individual trustees of that fund or, where the fund has a corporate trustee, all members must be directors of that corporate trustee.
In many cases, where the fund only consists of a husband and wife as members, this is a relatively simple requirement to satisfy. A choice is made regarding the preferred trustee structure – individual or corporate (read, Why you should have a corporate trustee) – and appropriate appointments are made.
John and Mary’s SMSF
John and Mary are married and would like to set up an SMSF. They have decided against using a corporate trustee structure and instead appoint themselves as the individual trustees of their fund.
In some circumstances, fund trustees may wish for their children to also join the fund.
Where this path is chosen, it must be remembered that the child will also need to be appointed as an individual trustee or director. This fact in itself is one that should be carefully considered prior to admitting a child as a member because it provides that child with a degree of control over the direction and decisions made for the fund – something that is not always desirable, particularly when family disputes arise.
Notwithstanding that, when these children are adults (aged 18 years or older) they can quite simply become an additional trustee or an additional director.
Adding an older child
John and Mary would like for their 19-year-old son Frank to join their SMSF. As such, Frank is appointed as an additional individual trustee and the fund now has three members and therefore three individual trustees.
Children under the age of 18 introduce additional complexities to running an SMSF. Predominantly, this is because, due to their age, they are under a legal disability and not legally allowed to act as a trustee or a director of a corporate trustee.
Fortunately, superannuation laws allow a parent to act as a trustee on behalf of the child to counter this limitation.
Adding a younger child
John and Mary would also like for their 16-year-old daughter Sophie to join their SMSF. As Sophie is under 18, she will not be allowed to act as an individual trustee. However, Mary may be appointed to act as a trustee for Sophie, as well as continuing to be an individual trustee in her own right – the fund will now have four members, and effectively three trustees (albeit, one of these trustees is wearing two hats).
Note: the ability to appoint Mary as Sophie’s representative hasn’t been available to funds that adopted a corporate trustee structure. However, a recent Tax Laws Amendment Bill, introduced into parliament on the 23 November 2011 will (once passed) rectify this anomaly.
Interestingly, the only people who are actually precluded from becoming a member of an existing SMSF are those who are employed by an existing member of that fund (unless they are related).
John and Mary also run a corner store that employs Sue. Sue is not related to either John or Mary and therefore can’t be a member of the same SMSF as John or Mary.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.